Traders track Nifty options for danger signs

MUMBAI: Derivatives traders are closely watching the direction of the put-call ratio - a popular options sentiment indicator - to gain a sense of what is in store for the markets. The put-call ratio (PCR) based on open interest, or outstanding positions of Nifty options, has fallen to 0.9 on Thursday from 1.06 on last Friday.

Analysts said heavy writing in call options, especially at 5200 and 5300 strikes, has resulted in a fall in the reading. "The recent levels in PCR-OI suggest a formation of bearish positions," said Siddarth Bhamre, head - equity derivatives at Angel Broking. Usually, PCR is used as a contrarian indicator, when the ratio reaches extreme levels. This means a sharp rise in PCR is seen as an oversold level, while a sharp dip is seen as an overbought situation. But, analysts' interpretations of 'extreme levels' is subjective.

Some analysts said a reading around 0.8 is considered a bearish trend and that the current level of 0.9 is perilously close to being pessimistic. "We consider a range of 0.8-1.1 as normal. Based on broader market movements, traders are considering 4,900 as a strong support for the near term," said Yogesh Radke, head - quantitative research at Edelweiss Securities. "A low reading means that traders are less hedged and, hence, the possibility of a fall is higher," he added.

On Thursday, Nifty call options between strike prices 4900-5400 saw large build-ups in open interest on Thursday, with OI in some contracts nearing 70 lakh units. "The only pullback in the indicators recently has been on account of addition in positions in put options," Bhamre added.

Although PCR regained to 0.96 on Wednesday, analysts were surprised it fell again on Thursday.

"We were expecting the PCR-OI to bottom out , but that did not happen and it fell further. If it bounces back , then it means long positions are being formed and it could be an indicator of a pull-back in the markets," said Shshank Mehta, derivatives strategist at Shah Investor's Home.